January 3, 2023
THE MARKETS
The market is looking to sharply higher prices to start the New Year. Packers jumped in to purchase what cattle were available in Iowa at $175 live, but no other regions reported sales. The sales were $2-3 higher than last week. The divergence between live sales and beef sales was not unexpected. The post holiday period each year witnesses a sharp decline in prices of the middle meats — popular during the holidays. This also is a period when margins at all levels of beef production are challenged with live sales posting losses, and processing also losing money.
Last week packers paid $172-$173 in the south and $172-$174 live in the north. Dressed sales were mainly at $273. Prices improved $1-$3 live and $3 dressed from the previous week. Fed supplies are feeling more current and while carcass weights remain over last year and probably will remain above last year, less cows will be slaughtered in the first quarter of next year and some of those slots will be replaced with fed cattle.
The next USDA cattle inventory, as of January 1, will likely show we have not yet begun to rebuild the national herd. This will force continuing pressure on margins in retail, processing, stocker, and feeding operations. Beef will continue to lose marketshare to chicken and pork — both in abundant supply. Rebuilding will begin in rapid order during 2024, but the progress will not be quick and the evidence will stretch for the next several years with weather cooperating.
This week’s surprisingly small slaughter at 508,000 head was 113,000 smaller than the previous week and 27,000 under last year.
Cattle Futures. Futures opened sharply higher on Tuesday as the first day of the new year’s trading began. The movement will be tested as box prices turned lower and slaughter volumes remain light.
Benchmarking. On Tuesday of each week, USDA releases a weighted average price report for all cattle sold the previous week. The report summarizes the distributed price levels for each category of sale such as Negotiated/Formula/Forward Contracts. Beef producers are able to measure the marketing price for their cattle compared to the national averages.
The Comprehensive Fed Cattle Weekly Report offers the most current information on the current status of fed cattle being harvested. The report is published each Tuesday and includes the previous week’s change in carcass weights and quality grading. The latest report shows carcass weights at 904# down 4# from prior week and 12# heavier than last year. Carcass weights will be fundamental in determining total beef production. The combined steer and heifer weights can easily be influenced when the proportion of steers to heifers in the weekly slaughter changes. Quality grade was down .50% at 82.50%.
The Weekly Steer and Heifer Grading Report is indicative of regional supplies of choice and prime cattle and often is determinative of regional differences is live price. The report is also reflective of the current status of fed cattle offerings in each area.
Forward Cattle Contracts: Forward contracts will always bear some relationship to the corresponding futures month closest to the delivery month for the cattle. Basis levels will move up and down as processors want to add to forward contracts or not. The driver in forward purchases of cattle will always be forward sales of beef. Packers will always be willing to take a price risk off the producer’s plate in return for an extra margin.
The total number of forward contracted cattle has declined as deferred futures and packer basis bids fail to provide sellers a profit margin for feeding profits. The decline of forward contracts pushes more cattle into the cash market where they are sold either as grid or negotiated prices. Not all of these cattle find their way into mandatory price reporting. Nevertheless, more cattle in the spot markets will provide more liquidity to the cash markets. The spread between futures and proforma break-even prices has made it difficult for packers to negotiate forward contracts.
The Cutout. Box prices were lower early morning then posted recovery by the close of business. The spread between choice and select is the narrowest in the first quarter of the new year.
The new year will bring the end meats and hamburger back into the sales promotions as winter time eating of beef begins.
Replacement markets
The replacement markets will as always be driven by weather. Much of the south that had suffered drought is now receiving needed rainfall joined by the Texas/Oklahoma Panhandles and Kansas where needed moisture has now fallen. Spring grazing and improved prospects for summer grazing will slow feedlot placements and create a crunch for feedyard occupancy percentages. Competition will remain stiff for smaller supplies for the feedlot.
Compared to last week: Feeder steers 2.00-5.00 higher. Feeder heifers mostly steady. Limited test of feeder steers over 800 lbs. and heifers over 650 lbs. Steer calves 4.00-8.00 higher. Heifer calves mostly steady. Demand moderate to good for feeder cattle; very good for calves.The price spread between a steer and heifer calf remains large as producers continue to buy for winter grazing. Nice rains fell last week and all pastures are in pretty good condition. Quality average to attractive. Supply included: 100% Feeder Cattle (52% Steers, 45% Heifers, 3% Bulls). Feeder cattle supply over 600 lbs was 46%.
OKC West —
Feeder Cattle Futures. Futures opened sharply higher with lower corn and higher live cattle.
Feeder Cattle Cash Index. The index is tracking the moves in cash prices.
Video and Internet Replacement Cattle Auctions. The movement from traditional private treaty sales to Internet auctions has been slow but steady. Producers have chosen this option as the primary marketing tool for most of the cattle offered in the replacement markets.
National Weekly Feeder Summary released on Friday of each week tracks the national prices by region for last week.
Grain Futures. Corn prices opened the new year lower. The combination of lower corn prices and lower corn basises will mean more favorable feed prices for many cattle owners. Corn basis offerings in Guymon, Oklahoma are at $1.20 — basis the March contract.
CATTLE MOVEMENTS BETWEEN REGIONS
Fed supplies have been tight in the southern plains causing some packers to make purchases of cheaper and higher grading cattle in Nebraska and Iowa and truck the cattle into southern beef plants. This has improved grading in the south and shortened fed supplies in the north.
The last USDA report showing grading differences showed Kansas with 3% more choice cattle than Nebraska. This was likely the result of cattle movements from north to south as regional differences are felt in the marketplace. Some cattle were shipped from as far away as Iowa for slaughter in Texas beef plants.
This past week those shipments seemed to have brought some leverage to Nebraska feeders who were able to improve the cash market from $171 to $174 – a $3 gain vs. the $1-2 gains in Texas and Kansas. The bargaining strength of the buyers and sellers seems to have switched back to sellers after a multi-week period when packers were able to buy cattle cheaper.
Most cattle selling now and into the first quarter of next year will lose money at the current price levels. The margin at the beef plants has also disappeared leaving both sectors in red ink. The pool of replacement cattle will decline with each passing month creating a competitive environment for feedlots attempting to hold on to occupancy levels.
CATTLE REPORT LIBRARY
Change is a necessity for any sustainable industry and sometimes necessary changes encounter obstacles in the form of stalwarts who refuse change. The Cattle Report has created a library page of opinions pieces published on these pages advocating fundamental and structure changes for the industry.
NOTE TO READERS
Sections of the newsletter are redesigned with hyperlinks to the appropriate source pages. The hyperlinks are in light blue within the report.
EXPLANATIONS OF BREAKEVEN/CLOSE OUT TABLES
Regional differences in grain and cattle basises create a difficulty in modeling a national composite for current close outs or a proforma forward look at a breakeven. Readers should consider your own area for adjustments to these models. Most calculations are basis relevant prices in Guymon, Oklahoma.
CURRENT BREAKEVEN PROJECTION
The Cattle Report introduces the FEEDER METER. The report estimates profit or loss for currently purchased feeder steers and projects a result 180 days out. The chart is interactive and updated every 15 minutes in real time based on changes in futures markets in grain and cattle. Corn basis information is based on current trade prices adjusted every two weeks. Feeder prices are based on the USDA index price for 800# steers and fed cattle sales are $2 cwt. premium the appropriate futures contract.
CURRENT CLOSE OUT
The Cattle Report estimates current profit or loss on cattle placed on feed 180 days ago. This report generated from industry averages attempts to simulate a typical close out based on the feeder index for 800# steers 180 days ago. The close out assumes grain was purchased at market each month. Selling prices and interest rates are based on prevailing benchmark quoted prices. This chart will change weekly.
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